NZ Super builds in-house with AI extension Investment News

The NZ Superannuation Fund (NZS) now manages about 30 per cent of assets internally, according to its just-released annual report, with a new artificial intelligence (AI) portfolio joining the in-house effort during the year.

However, outgoing NZS chief, Matt Whineray, says the internal investment team holds an even larger sway over the sovereign wealth fund, which stood at more than $65 billion at the June 30 reporting date.

“Beginning from a small team and an outsourced model, we have evolved to the point where more than half of our exposure and most of our active risk is managed in-house,” Whineray says in the report.

The in-house skills added 1.33 percent above the NZS passive reference portfolio over the last 10 years with ‘strategic tilting’ the stand-out performer to date.

“Our internally managed mandates performed well over the financial year, with Strategic Tilting and Tactical Credit being two of the largest contributors of value-add in 2022/23,” the report says. “The Strategic Tilting opportunity contributed $935 million in value-add in 2022/23, and represents the NZ Super Fund’s largest contributor to value-add since inception of approximately $4.6 billion.”

The fund also switched on an AI local shares portfolio in the reporting period, bringing a machine-learning strategy – named Keorangi – into play for the first time.

“Given the small initial capital allocation and short period in which [Keorangi] has been operating, we are cautious about overstating results to date; however, they have been encouraging,” the report says. “The new manager’s quantitative approach is differentiated to our traditional multi-factor managers, providing diversification to our current active equity allocations while maintaining commercial viability.”

In total, the fund runs about $2.25 billion in NZ equities, split about equally between an internal team (including passive and active styles) and two external managers: the Mint and Devon mandates stood at $712 million and $206 million, respectively, as at June 30.

Aside from the local shares robo-manager, the NZS awarded six new mandate during the financial year including two hedge strategies (Man AHL and Episteme), a couple of alternative real estate funds (APG Infrastructure and ESR Asian data centres) along with a pair of climate-focused unlisted portfolios (PIMCO and Wellington).

The New York-based hedge fund, Two Sigma – appointed in 2020 – was the only manager chopped over the reporting period.

For the 12 months to June 30, the fund was up almost 11.9 per cent but fell just shy (-0.16 per cent or -$102 million) of its passive reference portfolio for the period.

Over the almost 20 years to the end of June, however, the NZS remains 1.54 per cent ahead of the reference portfolio on an annualised basis, providing a significant after-tax benefit to the government’s bottom-line.

“Since inception, NZ Super Fund has received contributions of $24.9 billion from the Crown and added a gross value of $49.3 billion,” the report says. “As a result of this growth, NZ Super Fund has paid a total of $9.5 billion of tax back to the Crown, resulting in the net value added to the Crown of $39.8 billion.”

A large drop in performance fees for external managers year-on-year pared NZS costs for the period.

“As a percentage of average net assets, costs decreased from 0.49% in the prior year to 0.43% in the current year,” the report says. “In terms of dollar value, the cost of managing the NZ Super Fund’s investments was $255.4 million, a decrease of $22.7 million from the prior year.”

But fixed internal expenses rose including a $7 million jump in staff costs to $61.7 million: Whineray took home about $1.3 million in his final full year as CEO compared to $1.4 million in 2022.

Employee numbers grew from 141 four years ago to 216 at the end of June 2023 (190 last year) as the NZ Super assets and ambit continue to expand.

For the year ahead, NZS priorities include “reviewing our investment strategy and how the organisation best supports it to ensure scalability and a platform for growth for the future”.

NZS assets under management slipped below $62 billion, according to its online ticker, down from $65.4 billion at the end of June.

The incoming National government has committed to keeping up payments to the fund, which received $2.6 billion of taxpayer money over the 12 months to June 30.

Meanwhile, the outgoing Whineray is set to end his more than 15-year stint at NZS, the last five as chief, in December.